Do You Need Disability Insurance for More than Just Yourself?
We spend a lot of time talking about disability insurance claims and mostly focus on the big one: personal disability insurance. However, there are three other types of insurance that you may not have been aware of, and could be potentially helpful to you and your practice. Today, we’ll be taking a look at key-person disability insurance, buyout disability insurance, disability insurance for overhead, and, of course, personal disability insurance.
Personal Disability Insurance
Essentially, disability insurance is insurance that you buy for yourself in the event that you become disabled while working. If you work in a profession where disability is a possibility, it is important to have personal disability insurance for the sake of your future. For instance, dentists are at higher risk for disability due to repetitive movements and static positions, so it is crucial for them to have a disability policy.
Further, we recommend that you purchase an individual disability insurance policy for yourself, and not through an employer-sponsored program. This makes sure that the policy is not covered by ERISA in the event that you do have to file a disability claim.
Key-Person Disability Insurance
Key-person disability insurance is a type of coverage for those that own their own business or practice. This form of insurance covers an employee that is “key” to your business: someone who would be impossible to replace due to their skill, customer base, knowledge or burden of responsibility. If this person was to become disabled, and you had key-person disability insurance, the business would receive disability income checks. These checks could be used to cover the financial loss of the missing employee, or it could pay for a temporary worker while the insured person recovers from the disability.
There are several things to consider when determining if you should buy key-person disability insurance. These include the contingencies for the company if a key employee is disabled, the time to find and train a suitable replacement, the amount of revenue directly attributable to the key person, whether or not the key person’s disability will result in the loss of clients, and whether your company is willing to self-insure.
Unlike personal disability insurance policies, key-person policies are limited in their features and options. Often, they are custom designed for the company so that they meet specific needs, and are also often very short term, lasting between 12–24 months. This is because it is usually assumed that you could find and train a replacement in that time span.
Disability Buyout Insurance
This type of insurance provides benefits in the event that a co-owner or shareholder of the business or practice becomes disabled, and the company would like to buy out that person’s shares. This is significant because when an owner becomes disabled, the company is typically obligated to continue to pay the disabled person even though he or she can’t work, and the remaining owners must pick up the slack of the person who became disabled. Thus, this buyout insurance provides the remaining owners with a sum that would allow them to purchase the disabled owner’s stake in the company. This insurance also pre-establishes a fair price and set time at which the sum will be paid, which gets rid of costly negotiations. It is also useful because it ensures that the disabled owner will not sell control to a stranger because of cash needs.
The considerations for purchasing disability buyout insurance are similar to key-person insurance. You should think about the impact the disability of a partner would have on the practice’s income and where the money would come from to pay the income of the disabled shareholder. However, buyout insurance also has its own unique considerations, such as whether the business has adequate funds to buy out the disabled partner, or whether the practice would have to borrow money to do so.
Disability Insurance for Overhead
This type of insurance pays for the expenses of operating your business if you become disabled and cannot work. This includes things such as rent, interest payments on some business debts, utilities, and employees’ salaries. These policies usually have short benefit periods that do not exceed two years.
Disability insurance for overhead could be useful if you have a disability that is temporary. It is also important in that it can be used for maintaining your business when you’re seeking treatment and trying to figure out what the next step is.